No. 1, 2006

Daria Vasilevskaya
Cand.Sc. (Law), Deputy Director of the Mineral Development PSA Projects Center under the RF Ministry of Natural Resources


The main objective of improving the Law "On Subsoil" is to create transparent and stable terms of Subsoil management and use

One of the top priorities confronting Russia today is to create a uniform legal framework for an effective subsoil management system to ensure efficient use, protection, and reproduction of subsoil resources with due regard for the interests of the state and the subsoil users (license-holders). The RF Ministry of Natural Resources, in accordance with instructions by Russian President Vladimir Putin and the RF Government, is working to improve the legislation on mineral resources, focusing on the main provisions and principles of the draft Federal Law On Subsoil, currently being prepared.

A Strategy Targeting Transparency

The main objective of improving legislation on mineral resources is to create absolutely transparent and corruption-free terms of access to subsoil resources and to provide for predictable and sustainable relationships in the field of subsoil management and use. This will certainly enhance the investment attractiveness of raw materials producing industries, which, in the one hand, will create additional incentives for private investment into geological exploration work and, on the other hand, will generate additional tax payments from mineral producers, so federal budget revenue will increase.

As for the role of the draft Federal Law On Subsoil in Russia's overall legislative framework, it should be pointed out that this federal law will be a separate element of the legislation on the use of natural resources. At the same time, it will be fully in line with other system-forming instruments, such as the Water Code, the Forestry Code, the Land Code, the Civil Code, the Tax Code, etc.

The draft Federal Law On Subsoil has been updated to accommodate comments and proposals from federal and regional executive agencies and license-holders. The updated draft has been submitted for re-approval to the executive bodies concerned.

It should be noted that the new draft contains a proposal to establish that Subsoil resources are in federal ownership. This will enable the state to manage subsoil resources efficiently in accordance with the long-term government strategy and medium-term and short-term mineral exploration and restoration programs.

At present, subsoil management relationships between the state and the investor around the world are governed either by licenses (administrative regulation) or by contracts (civil-law regulation).

In view of the current trends in the Russian Federation toward liberalizing laws, lowering administrative barriers, and developing a transparent system for granting management rights for subsoil blocks, the draft law stipulates that, following the enactment thereof, subsoil blocks will be granted for use on the basis of contracts (agreements), with relationships under subsoil use licenses issued to be governed by a dedicated chapter in the law.

Considering the special features of subsoil use relationship regulation and in view of the fact that Subsoil blocks cannot be viewed as ordinary objects of civil-law relationships, government-investor relationships are supposed to be based on special-type agreements, different from those governed by the RF Civil Code.

Using a dedicated agreement to govern relationships between the state and a subsoil user makes it possible to define the parties' rights and obligations, penalties for non-performance of contractual commitments, etc. in greater detail.

The planned transition to contractual relationships is not to entail mandatory transition from licensing to contracting. Subsoil users that will have obtained subsoil use licenses prior to the effective date of the new law will be able to continue operating under those licenses in accordance with their terms but will have the option of shifting to a contract, subject to mutual agreement between the authorities concerned and the subsoil user.

From Bids to Auctions

The draft law being developed is intended to modify the procedure for granting subsoil blocks use rights. The granting of Subsoil use rights will involve two mechanisms the results of specialized auctions and decisions by authorized bodies'. Which of the mechanisms will be used will depend on the purpose of the subsoil use. As per the existing Russian Law On Subsoil, the grounds for granting subsoil use rights are auctions, bids, and authorities' decision.

In preparing the new draft of the Federal Law On Subsoil, we have analyzed bidding practices and held numerous consultations with colleagues from various government bodies both federal, and regional as well as with subsoil user companies, and arrived at the conclusion that bids for mineral use rights are a mechanism complicated with many subjective factors which affect the selection of the companies for granting contracts to subsoil blocks. Therefore, to make legislation more transparent, we have decided not to include the bidding procedure in the draft Federal Law On Subsoil.

Rights for subsoil use for geological exploration purposes are also to be auctioned. But there is a specific feature in such auctions, i.e. if there is only one bidder for a subsoil block, the exploration rights may be granted to such bidder in accordance with the auction's terms.

The new draft describes in detail the auction procedure and the requirements to bidders, the auction results evaluation procedure and the grounds for voiding auctions. The level of detail of the provisions concerning auctions is so high that no further methodological regulations will be required.

At present, in the process of developing auction terms it is quite difficult to decide which terms of the auction must be necessarily included in the license and which terms may be left out. The draft law includes an article listing the material and mandatory terms. The decision to include or not to include certain terms in the subsoil use agreement will be made depending on the mineral involved and the purpose of the subsoil use.

New Terms of Subsoil Use

The draft law describes the material terms of subsoil use. The terms will vary depending on the purpose of the subsoil use. The material terms must be included in the subsoil use agreement.

The draft law has sections and articles that define the specific terms of using subsoil resources depending on the type of the mineral to be developed, with different terms for the development of solid minerals and hydrocarbons, the use of underground water resources, and the construction and operation of underground facilities.

A new rule, which is not found in the existing Law, is the procedure for launching the industrial commercial development of mineral fields, which will provide for stricter supervision of efficient use and protection of subsoil resources and will ensure that only properly prepared fields are put on stream.

The draft stipulates that commercial development of mineral fields may commence only after completion of field production facilities, infrastructure, and subsoil protection and environmental safety facilities' construction. Those facilities may only be built in accordance with duly approved preliminary field development plans.

The draft law also defines subsoil users' obligations to keep record of the target minerals and associated components produced during field development operations, in accordance with approved technical regulations, including metering by each individual well in accordance with the approved field development plan.

The state-investor relationship will be governed by both administrative and contractual principles. Administrative principles will apply to subsoil users that will have obtained mineral rights prior to the new law's effective date; relationships with subsoil users that will obtain mineral rights after the law becomes effective will be governed by contracts. There is a difference between licensing and contractual procedures for governing subsoil use rights, so different assignment rules will apply. Transfer of mineral rights under a license will require re-issuance of the license, just like it does today. Contractual mineral rights may be transferred subject to permission of the government body concerned, provided that the new subsoil user meets the requirements of the relevant law.

In view of existing legislation development trends, the new draft law contains special provisions which enhance subsoil users' liability for adverse impacts on the environment, including mandatory insurance of liability for damage to subsoil resources and the environment.

Besides, the draft Federal Law On Subsoil requires that Subsoil users must have an abandonment fund, to accumulate cash from operations for conservation of abandoned fields, wells, mines, and other underground facilities upon the completion of field development operations. Abandonment funds are necessary, because, as known from experience, subsoil users, especially small and medium-sized operators, do not always have enough cash at final stages of field development operations to perform proper abandonment conservation and decommissioning.

In conclusion, I wish to point out that the RF Ministry of Natural Resources continues to work on the draft Federal Law On Subsoil. All the comments and proposals sent in are reviewed and integrated, and many are accommodated in drafting the law.

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Oil of Russia, No. 1, 2006
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